Beyond Origins the Discussion

Why The Price Of Crude Oil Is Causing Higher Fuel Prices In Politics For 2008.

August 7th, 2008

Crude oil has one of the most complex and variable pricing mechanisms in the commodities market, and for that matter in the entire market. The price of crude oil is affected by a host of different factors, and it can be extremely difficult to determine exactly what is pushing prices upward or downward at any given point in time. As you have no doubt seen recently, the crude oil markets have been extremely volatile and many have found themselves with insane profits, or miserable losses.

In highly efficient capital markets with an inelastic demand coupled with a constrained supply, markets will adjust backwards to the old prices within a few days or a week at the most. The only difference between now and before is the extra $0.47 or so would now be going to oil producers, oil suppliers, refiners, and the owners of the gas stations. Even a small change like this would cause major profits for any investor that is holding a Gas Stock.

World crude oil supply is somewhere between 84-85 million barrels per day while world crude demand is somewhere between 86-87 million barrels per day. The most recent numbers show that through April the United States was using 19.96 million barrels of crude oil per day, or somewhere between 23-24% of all daily demand. The United States only produces roughly 30% of the crude oil it uses domestically, which means we are importing roughly 14 million barrels per day. It’s easy to see how at the current prices of ~$130 per barrel this can add up very quickly. Until some portion of demand is completely destroyed to balance out supply and demand, don’t expect a relief in the price of crude oil and don’t expect this argument to go away.

The interference of politicians is not something new for the commodity markets, especially oil, even in crisis mode, the politicians simply will not stop playing their games. Don’t believe for a second that once oil makes a short term pull back that the politicians will not take credit for the market forces that caused the pullback because there is no doubt that they will. It will be much more humorous to see the look on their faces and hear their bumbling excuses when crude breaks $200 a barrel and gasoline is over $6.00 a gallon. Even without a direct short or middle term effect on prices, these issues are a matter of national security. If we go to war in the future with a country who has control of the Crude Oil Drilling, they could effectively aggravate problems in the United States economic system without firing one bullet or using one soldier. Our “Strategic Petroleum Reserve” only has about ~700 million barrels, and including current online production, that would last us just 50 short days. The government should have never stopped filling the SPR as it has placed our country at extra risk.

If the gasoline tax proposed in politics became permanent the plan would be much better suited because it would help the refiners and gas station owners boost their profit margins. As ridiculous as that may sound to you, that is exactly what needs to happen. Contrary to popular believe, the refiners and gasoline station owners are actually getting killed because they are at the mercy of the commodity spot market prices (the prices at which physical goods trade on the open financial markets) since they do not actually produce the good. “Big Oil” only acts as a middleman and output, not an input as many believe. In the oil business they call this middlestream and downstream. Believe it or not, many gas stations are closing around America because they simply can’t keep up with the pricing increases. The %KEYWORDCAP2& has gone up substantially more than gasoline in the last couple of years, and it has come to a point where many of the gas stations and refiners are actually losing money every time they sell you gasoline. The reason for this is not because the producers of oil are over-charging for their product[spin], it is because they are trying to raise prices more gradually as to not completely shock the [spin]American consumer.

We are so reliant on crude oil drilling to run our economy that it is important not to overreact to short term volatility. Those investors who are able to cut through the noise and analyze the facts will be rewarded with great returns in the long run.

Entry Filed under: Business